In current context, business broad AUM of all 100 ETFs on the finish of February 2021 stood at Rs 271,198 crore exhibiting an increase of 44% from Feb 2020. Although ETFs have been in existence in India for 20 years, the expansion in ETF really might be witnessed within the final 5-6 years. Among the causes which have contributed to rise in ETF AUM in India are:
- Authorities’s use of ETF as a most popular route for disinvestment has elevated the participation of retail traders
- ETFs are being utilized by EPFO and personal PF our bodies to take publicity within the fairness market
- Shrinking alpha in lively fund area has made even a median investor privy to the advantage of plain vanilla ETFs like NIFTY, Sensex and so on.
Additional, what’s thrilling is to see an increase in participation of retail traders in ETFs. As an illustration, the variety of retail folios in ETFs aside from gold stood at 2,50,034 in December 2015. This has elevated at an annual price of 57% to fifteen,03,033 in December 2019. Within the final one 12 months, this has greater than doubled to 33,81,776 folio in December 2020. It highlights that traders have tailored ETFs at a a lot quicker tempo than most of us would have anticipated.
This shift the place traders need to add ETFs of their portfolio together with lively funds can be due to the underperformance of the big cap mutual fund class in current occasions. Whereas a number of the lively fund homes have accomplished properly, however general at an mixture business degree, efficiency is lagging, which has made traders cautious about the fee that’s being levied. The simplicity of the product is what makes ETFs extra interesting. Other than simplicity, the low price, tradability function, clear portfolio, centered publicity and accessibility to purchase and promote at intra-day internet asset values has contributed to the rise and recognition of ETF.
Additional, ETFs might be of varied sorts as a result of so long as underlying for an ETF is an investable universe which is represented by an index, there might be an ETF on it. Globally there are ETFs monitoring broad-based indices, sectoral indices, mounted revenue indices, thematic indices, sensible beta indices, commodities reminiscent of gold, silver and so on. There are even leverage and inverse ETFs.
The most well-liked ETFs are clearly the one monitoring broad primarily based indices reminiscent of S&P 500, Nifty50 and so on. An important motive for them being standard is that over the time as mentioned earlier the market turns into informationally extra environment friendly and beating the benchmark turns into progressively tough. Therefore, ETFs which can be found at very low price and removes the fund supervisor threat of underperformance, turns into a compelling funding product.
Additional, taking a look at international tendencies, there’s a shift from as soon as ETF being solely used for the aim of taking passive publicity in a broad-based index to at this time the place ETFs are a most popular route of funding automobile if any individual needs to seize and get benefitted from explicit theme reminiscent of ESG, cloud computing, robotics, synthetic intelligence and so on. Increasingly more ETFs are additionally being adopted to take smart-beta exposures in components like momentum, low volatility and so on.
Going forward, if alpha continues to shrink specifically within the large-cap section, we could witness fast adoption of ETFs among the many traders. Additional, the pandemic has accelerated the necessity to diversify one’s portfolio. In such circumstances, ETFs develop into a superb automobile to put money into the overseas markets, themes and completely different asset lessons. ETFs are thus, an ideal medium for an investor to take clear, low price strategic or tactical publicity in desired segments of the market primarily based on his or her threat profile.
(The author is the CEO of Mirae Asset, India)